Behaviour economics and welfare/stimulus payments

Business week has an interesting story on the role of designing policies based on behavioral economics. In short, behavioral economics suggests that people are not rational and that they will make decisions not entirely based on rational cost benefit analysis. Well, who knew.

The “making work pay” program in the US was designed to give people stimulus money in small additional payments to their salary and in theory they would have spent the money. What actually happened was that people did not see the small additional difference and saved the money. That by itself is not a bad consequence just that it does fit with the Keynesian stimulus economics.

What is interesting here is that in Australia it was the other way round. There is clear agreement here that lumpsum money is spent immediately on big ticket items. For example, Kevin Rudd when he was Prime Minister decided to give $900 in stimulus for most people and a lot more for families with children. There were stimulus ads everywhere for people to spend that money. And they spent.

Another example is the baby bonus. In Australia when we have a child the government provides $5000 as a baby bonus to families. What was observed that for some families that created a negative situation in how the money was spent. Now, the bonus is paid over 13 weeks and it seems to work better.

What I am not sure is how did the behavioral economists in the US came to the opposite conclusion for the spending of stimulus money?


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